Difference Between Secured and Unsecured Loans
What Are Secured and Unsecured Loans?
An example of a secured loan is a mortgage. It’s a financial agreement where you use an asset or property as security against the capital you’re borrowing. Commercial secured loans are often taken out when a larger amount or longer loan term is required.
Also known as collateral, the security you provide in the form of assets or property can be seized if repayments are not adhered to. Secured loans enable you to take out more money over a longer term while being easier to obtain because of the security you’re providing. Often known as homeowner loans, secured loans are also a type of business loan that you can use the capital from to invest in your company.
An unsecured loan doesn’t require you to put down any collateral. Credit cards, student and personal loans are all types of unsecured loans. They’re typically more challenging to secure from lenders as their approval is based on whether they view the borrower as creditworthy, which is determined from several factors including credit score.
With unsecured loans, if you default on a repayment, the lender could commission a debt collection agency to recover the debt. The lender may also take the borrower to court. Some laws ensure lending practices are not discriminatory and based solely on an applicant’s creditworthiness. However, because unsecured loans are riskier for lenders than secured loans, they’re more challenging to secure.
What are the Differences Between a Secured Loan vS Unsecured Loan?
- Providing Securities/Collateral
- Approval Difficulty
- Amount of Available Capital
- Varying Interest Rates
- Length of Process
One of the main differences between secured vs unsecured loans is whether you need to put down securities. A secured loan requires you to provide an asset or property. If a repayment is missed, the lender can seize the securities to repay the debt. Whereas with an unsecured loan, no security is required and approval is gained based on the borrower’s creditworthiness.
How difficult the finance is to obtain depends on whether you choose a secured or unsecured loan. Being approved for a secured loan is based more on the securities you put down, rather than your creditworthiness, which unsecured loan lenders rely on more. If you’re a start-up business, you may not have a property or sufficient assets to put up as security. The approval difficulty for both types of finance will vary depending on your circumstances.
Amount of Available Capital
Typically, you can borrow more when you take out a secured loan. This is because the agreement is less of a risk to lenders as they can seize the security if the borrower defaults on payments. As this isn’t possible with unsecured loans, lenders are less willing to allow you to borrow larger amounts.
Varying Interest Rates
Interest rates vary depending on many factors. Working with a business finance specialist increases your chances of securing a finance agreement with a favourable interest rate, for example. Secured loans, however, typically have lower rates of interest because there is less risk for the lender.
Secured loans typically have longer repayment terms. Depending on your business’s circumstances, it may be beneficial to repay the loan over a longer period. This is normally true with secured loans as you borrow more than with an unsecured loan. However, repaying the loan quickly could reduce the amount you pay in interest.
Is it Better to Have Secured or Unsecured Debt?
Secured debt typically has longer repayment terms and lower rates of interest. If you require a large amount of capital, such as for purchasing business premises, secured debt is much more favourable. Unsecured debt may have a higher interest rate and shorter repayment terms; however, if you have borrowed a small amount of capital, you may want to pay off the debt quickly to potentially improve your credit score and reduce how much you pay in interest.
The right choice of finance depends on your circumstances. If you’re unsure of what’s the best deal for you, business finance specialists, like our team at Millbrook, can guide you towards the most beneficial outcome. Large corporations, SMEs, and businesses just starting, all require finance for varying purposes. Depending on your circumstances and requirements, a secured or unsecured loan may be the best choice.
What are the Main Advantages of Secured vs Unsecured Loans?
Advantages of Secured Loans
- Increased available capital - As you’re providing a security, there is less risk for the lender, so they will offer more capital. This is the most effective finance product if you’re borrowing funds to purchase a property, for example.
- Bad credit considered - The security you put down decreases the risk for the lender, which means they will consider applicants who don’t have high credit scores.
- Longer repayment terms, up to 10 years - There are loan repayment terms up to 10 years for secured loans. The security ensures the lender’s funds are protected while enabling you to borrow larger amounts of capital too.
Advantages of Unsecured Loans
- Access to funds within 8 hours - Obtaining approval for an unsecured loan is typically a quick and simple process compared to secured loans. As you don’t have to own a property, there is no evaluation required, only a credit check.
- Ideal for start-up businesses - While unsecured loans are available for both new and established companies, they’re ideal for start-up businesses. You can secure funds fast, without having to put down any assets as a security.
- Repayments of up to 5 years - Depending on how much capital you’re borrowing, your preferred repayment term will vary. Unsecured loans are available with short- and long-term repayment plans, including up to 5 years.
Millbrook Business Loans
Business loans can be invested in any aspect of your company. Whether you need assistance with working capital, new equipment or staff, or property renovations, you can use the capital in the best way for your business.
Working with Millbrook’s business finance specialists gives you access to competitive business loan rates. If you’re unsure whether a secured vs unsecured loan is right for you, get in touch with our team today or visit our business loan page for more information. Call us on 0333 015 3301 or visit our contact page.